Japanese shares rise, yen falters as BOJ rate hike bets fade By Reuters

By Stella Qiu

SYDNEY (Reuters) – Japanese shares rose and the yen fell on Thursday as the risk of further monetary policy tightening this year faded, while strong gains in Hong Kong’s stock market took a break.

The euro suffered heavy losses as markets stepped up bets that the European Central Bank will cut interest rates at each of its October and December meetings after top policy hawk Isabel Schnabel said she expected inflation to fall from new to target.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1 percent while rising 2.2 percent as a weaker yen boosted the outlook for Japanese exporters.

The dollar rose another 0.3 percent to 146.84 yen, about the highest in months. It had already risen 2 percent overnight as Japan’s newly elected prime minister, Shigeru Ishiba, said the country was not ready for further rate hikes after meeting with central bank governor Kazuo Ueda.

Ueda also said the central bank would proceed with caution when deciding whether to raise rates. Dovish BOJ policymaker Asahi Noguchi also said the BOJ must patiently maintain loose monetary conditions.

“Put together, I think it’s an overarching boost for USD/YEN because to me it’s taken rate hikes off the table for 2024… More likely we’re talking about the next tightening won’t be until 2025,” he said. Tony Sycamore, analyst at IG.

“I think the dollar/yen will be driven by the US side of the equation now. Given that we saw some good US jobs data this week – if that turns out to be the case for non-farm payrolls tomorrow – USD/JPY may continue to move higher towards 149.40, what we saw in mid-August.

Futures imply a less than 50% chance the BOJ will hike 10 basis points by December, while rates will rise to just 0.5% by the end of next year from the current 0.25%.

Elsewhere in Asia, mainland China’s markets are closed for the holiday, but Hong Kong lost 2.5 percent after rising 6.2 percent a day earlier. The benchmark is still up a staggering 30% in just three weeks after China announced a wave of stimulus measures to revive a faltering economy.

Overnight, Wall Street was largely flat, although Treasury yields rose after a strong private payrolls report added evidence of a healthy US labor market, easing the risk of a major negative rate cut for data from on Friday regarding non-agricultural wages.

Bonds this week were supported by refuge flows as geopolitical tensions in the Middle East rose. Israel said eight of its soldiers were killed in combat in southern Lebanon as its forces entered its northern neighbor in a campaign against the armed group Hezbollah.

Two-year Treasury yields were little changed at 3.648 percent, while ten-year yields were flat at 3.79 percent.

Markets are implying a 36 percent chance the Federal Reserve will cut another 50 basis points in November, compared with nearly 60 percent last week, and price it at 70 basis points by the end of the year.

In currency markets, the euro fell to $1.1040, just above key support at $1.10 and not far from Wednesday’s low of $1.10325, a level last seen on September 12.

Oil prices rose on fears that escalating conflict in the Middle East could threaten oil supplies from the world’s biggest producing region. futures rose 1.1% to $74.68 a barrel. (OR)

Gold approached a record high at $2,655.90 an ounce.